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Better Buy: The Walt Disney Company vs. Netflix

By Rick Munarriz - Feb 8, 2018 at 3:13PM

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Pitting the top dog in content with the top digital distributor is a fierce fight, but only one media giant can rise to the top.

The streaming battle lines are being drawn. Disney (DIS 3.69%) and Netflix (NFLX 5.03%) may be partners now, but things will be very different at some point next year. Disney is set to launch its own premium digital service in 2019, and it's gradually pulling some of its content off Netflix's massive vault. 

We don't know everything about Disney's stand-alone offering. The media giant has said that it will be priced competitively. Beyond Disney's impressive catalog of content, it will create original shows based on its popular Star Wars, Marvel, and Disney franchises for the new platform. Disney's chances of succeeding are strong, but it doesn't mean that it will come at the expense of Netflix. There is plenty of room here for both players to win -- and win big. Investors wanting to pick a side will naturally want to know which stock will be the bigger gainer, and that's the task that we'll tackle here.

A clip from a Disney Channel musical show.

Image source: Disney.

A whole new world

"Buy both" would be the easy way out of this debate, and it would be honest advice. Netflix and Disney are my two largest personal holdings. I've owned the two stocks forever. However, you deserve a Sophie's Choice moment where I have to choose between my two biggest stocks, so let's start with momentum.

Netflix is the hot investment right now. It's the top performer among S&P 500 components over the past five years. Disney, on the other hand, has lagged the market in that time. Fears of cord-cutters eating into its cable networks and broadcasting empire have kept investors away, and rightfully so. Just one of Disney's four businesses -- its theme parks -- posted an increase in revenue or segment operating profit in fiscal 2017. 

Netflix, on the other hand, is hitting on all cylinders. It just closed out the fourth quarter with a record 8.3 million more subscribers than it had three months earlier. Revenue growth is actually accelerating, and profitability has been explosive now that's it's in the black overseas. Netflix isn't perfect. Free cash flow remains fiercely negative, and DVD-based subscribers continue to cut the postal connection with Netflix. However, Netflix is clearly the one taking big steps up at a time when Disney is seemingly lucky to be marching in place. 

Disney will naturally win the more traditional valuation argument. It can be had for less than 15 times this fiscal year's earnings target, unlike Netflix's multiple that's approaching 100. Netflix commands a price-to-sales multiple that is nearly four times what the House of Mouse is commanding. Disney also pays out a modest dividend yield of 1.5%, something that Netflix isn't likely to do for several more years.

However, we know that the market doesn't make decisions based solely on near-term valuation calls. Netflix was outrageously overpriced five years ago by those same measuring sticks, and it was still the S&P 500's biggest gainer in 2013 and again in 2015.

And the envelope, please...

I have to give Netflix the ultimate nod here. It's seemingly unstoppable at this point. As successful as Disney will probably be on the streaming front in 2019, Netflix hasn't skipped a beat in a world where Hulu, Prime Video, HBO Now, and countless other media-helmed platforms have emerged. It will probably have more than 150 million premium subscribers worldwide before Disney signs its first member. 

I see both Disney and Netflix beating the market, but if you told me which of the two will deliver the biggest gains in the next few years, it's hard to bet against the one that's done exactly that over the past few years. 

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Stocks Mentioned

Netflix, Inc. Stock Quote
Netflix, Inc.
$190.85 (5.03%) $9.14
The Walt Disney Company Stock Quote
The Walt Disney Company
$97.78 (3.69%) $3.48

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